4. Gamez Corporation is introducing a new toy to the market. They expect sales to last for 4 years, and to be around $1,000,000 each year. The cost of producing the toy will be 25% of the sale price. Additionally, the company expects to increase its advertising expenses for the toy by $100,000. In order to produce the new toy, the company requires a redesign to the current factory, which will cost $20,000, in addition to a new machine. The price of the new machine is $2,100,000 and it will have a useful life of 4 years. The company will depreciate it to zero and does not expect to sell it at the end of the project. The required working capital will be 20% of revenues for the first 3 years and will go to zero in the fourth year. The company is taxed at a 30% rate and earns 8.5% at the bank. The inflation rate in the economy is 3%. What is the NPV of this project when without considering inflation? What is the NPV of this project when inflation is accounted for? Solution: Without inflation NPV = 13,415 With inflation NPV = -85,127